Design Criteria for Energy Market Prices

Transcription

1 Design Criteria for Energy Market Prices Energy Price Formation Senior Task Force February 15, 2018 Catherine Tyler

2 Market Pricing Principles A market is a set of interactions between buyers and sellers. Market prices are determined by the buyers valuations and sellers costs. Competitive market prices are determined on the margin. Sellers who cannot supply at the price determined on the margin, do not sell. Buyers whose value of the product is less than the market price, do not purchase. 2

3 Short Run Market Equilibrium P *

4 Short Run Market Equilibrium Consumer P * Producer

5 Short Run Market Equilibrium Consumer P * Producer Short Run Marginal Costs

6 Efficient means both o o Cost minimizing Curve Convexity Consumer and producer surplus maximizing With significant increasing returns to scale in production, marginal cost pricing may not support an efficient market outcome. An efficient market requires coordinated intervention. o o Uplift is a form of coordination. Marginal cost pricing with uplift results in efficient market outcomes. 6

7 Marginal Cost Pricing P MC

8 Marginal Cost Pricing P MC Consumer Producer

9 Marginal Cost Pricing with Uplift Make Whole P MC Consumer Producer Short Run Marginal Costs

10 P R Repricing P MC

11 P R Consumer Repricing P MC Producer

12 P R Consumer Repricing P MC Producer Short Run Marginal Costs

13 P R P MC Consumer Producer LOC D Repricing LOC S Short Run Marginal Costs

14 P R Consumer Repricing P MC Producer LOC D LOC S New costs are created, so total market surplus is reduced. Short Run Marginal Costs

15 Repricing to Reduce Uplift Make Whole P R P MC LOC Repricing that reduces total uplift has the same efficiency loss.

16 Assumptions in Repricing The behavior of producers and consumers will not change due to repricing. Uplift payments provide the same quality signal for efficient behavior on the margin as prices. The size of the reduction in uplift is large enough to justify the change. The Market Monitor does not agree that these assumptions are valid. 16

17 Better to Address Underlying Issues Directly Problems are really about scarcity and reserves. Conservative operations mean commitments can exceed modelled reserve requirements. Prices fall when operator commits a resource in real time because commitment causes supply to exceed load plus reserves. Pricing operator actions to cause the reserve requirement to reflect the actual requirement that PJM is committing to cover. 17

18 FERC Price Formation Goals (1) maximize market surplus for consumers and suppliers; (2) provide correct incentives for market participants to follow commitment and dispatch instructions, make efficient investments in facilities and equipment, and maintain reliability; (3) provide transparency so that market participants understand how prices reflect the actual marginal cost of serving load and the operational constraints of reliably operating the system; and (4) ensure that all suppliers have an opportunity to recover their costs. 18

19 Proposed Design Criteria Energy prices signal efficient short run energy market behavior on the margin Full reflection of operational reliability requirements included in the market Maximize market surplus for consumers and suppliers 19

20 Monitoring Analytics, LLC 2621 Van Buren Avenue Suite 160 Eagleville, PA (610)